By most accounts, Advanced Micro Devices, Inc. (NASDAQ:AMD) is a must-own name. Though AMD stock is up almost 60% since this time last year and up nearly six-fold in the past two years, Bank of America Merrill Lynch recently reiterated a price target of $18 on the shares. That’s more than 30% upside from current levels.
What’s prodding the shares? Healthy demand for AMD’s new Ryzen processor, for one, which has put some unexpected pressure on CPU icon Intel Corporation (NASDAQ:INTC). And, at the same time, the meteoric rise in cryptocurrency mining has created a market for GPUs that NVIDIA Corporation (NASDAQ:NVDA) alone can’t fully supply.
Still, what if Advanced Micro Devices shares already reflected their maximum potential and didn’t offer anywhere near as much upside as the headlines would have you believe?
That may well be the case.
Advanced Micro Devices is Losing Mojo
It’s a notion that’s as tough to put in writing as it may be for some die-hard owners of AMD stock to digest. And, while it may well be wrong, there are some red flags that can’t be ignored.
Above all else, it would be naive not to acknowledge that AMD has predominantly been a story stock. That story has been a turnaround effort led by the introduction of its Ryzen CPU and Vega GPU; the timing of cryptocurrency mania was just a happy coincidence.
And like all story stocks, AMD stock has relied on the media’s optimism and the investment market’s chatter to keep the ball rolling, While sales have grown remarkably, profits — and GAAP profits, in particular — remain elusive. Advanced Micro Devices is expected to move into the black next year, but even so is still trading at almost 40 times 2018’s projected earnings.
And that’s a problem for a story stock. See, without a rock-solid fundamental foundation, eventually the “great future” shtick gets old and investors lose interest in fanning the bullish flames.
There’s some empirical evidence that investors are losing their interest in Advanced Micro Devices.
The chart below (from Thomson Reuters Eikon) looks at all the discussion of Advances Micro Devices on various social media networks, measuring not just how frequently it’s discussed, but gauging how much of that chatter is bullish or bearish. In that it’s far less likely to be professional stock-pickers and far more likely to be retail investors using social networking platforms to discuss stock picks, this data is a good reflection of what the average retail investor is thinking about AMD stock.
Two things stand out. First, there’s less discussion of Advanced Micro Devices since the stock peaked in early April; the bars are getting shorter even though the stock has mostly held its ground. Second, the discussions of AMD stock that have occurred since March and April have been less and less optimistic. Though not yet net-negative, with a margin of only 10% more positive (green) than not compared to a margin of 35% net-positivity late last year en route to huge gains, investors are clearly not as impressed as they used to be.AMD’s stock price hasn’t suffered too much as a result of that growing disinterest. It’s broken below a minor support level (yellow) though, after being unable to push through a horizontal ceiling around $15.50 in late July, right after a second-quarter earnings report that was regarded as a victory.
When much of the “story” for a story stock is a riff on sheer bullishness, as that theme ebbs, investors start to question everything.
Bottom Line for AMD Stock
This doesn’t inherently spell doom for AMD stock. Indeed, if Advanced Micro Devices shares don’t break under the low of $11.86 from a couple weeks ago, the whole matter of waning interest will be moot.
Still, in that sentiment is cyclical — generally from one extreme to the other — current and would-be owners of Advanced Micro Devices shares need to note that subtle, obscure clues are already flashing warning signs even if the overt clues and headlines aren’t.
At the very least, traders should be asking themselves why AMD stock isn’t being treated the same heroic way it was being treated just a few weeks ago.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jbrumley .